MFs pull out Rs 30k cr from income funds

NEW DELHI: They are no more the darlings of Indian investors. We are talking about income funds. Over the past 12 months, MFs have pulled out over Rs 30,000 crore from income funds.

In fact, the amount of money pulled out exceeds the total assets managed by equity funds in India. Investors withdrew their money every month this year due to negative returns over the past 6-9 months. They are likely to end the year with negative returns against 6-7% last year.

Statistics show that the cash moved out of income funds is being invested in cash funds and floaters. Over 20,000 crore has been parked with floaters compared to Rs 189 crore in March '02. Cash funds have added more than Rs 25,000 crore over the past year.

"Large-scale redemption in income funds is being met out of winding up of government paper and so the relative allocation to corporate bonds has gone up," said JM Mutual debt desk's Nandkumar Surti.

Investors now prefer short-term funds because of the heightened uncertainty over interest rates. The debt market is apprehensive after suffering a swing of more than 150 bps on 10-year government paper in September.

Rising uncertainty about interest rates and the government securities market has caused income funds to increase their exposure to corporate bonds. In October '03, income funds had put 65% of their corpus into gilts. Now, the same funds have put 50% of their assets in corporate bonds, scaling down their exposure to gilts to 25%.

"Investors show a natural bias against long-term paper during periods of high uncertainty. Short-term paper becomes safer," said a debt fund manager. This is borne out by the declining average portfolio maturity of income funds, currently three years.